<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File No. 1-9223
SERVICE MERCHANDISE COMPANY, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0816060
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 24600, Nashville, TN
37202-4600
(Mailing Address)
7100 Service Merchandise Drive, Brentwood, TN
(Address of principal executive offices)
37027
(Zip code)
(615) 660-6000
(Registrant's telephone number including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date.
As of April 27, 1997, there were 99,780,351 shares of
Service Merchandise Company, Inc. common stock outstanding.
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<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations (Unaudited) - First Quarter Ended
March 30, 1997 and March 31, 1996 . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets - March 30, 1997 (Unaudited),
March 31, 1996 (Unaudited) and December 29, 1996 . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) - First Quarter
Ended March 30, 1997 and March 31, 1996 . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . 6-8
Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-12
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
<CAPTION>
First Quarter Ended
-------------------------------------
March 30, March 31,
---------------- --------------
1997 1996
---------------- --------------
<S> <C> <C>
Net sales $686,400 $715,628
Costs and expenses:
Cost of merchandise sold and buying and occupancy expenses 531,640 554,870
---------------- --------------
Gross margin after cost of merchandise sold and buying and
occupancy expenses 154,760 160,758
Selling, general and administrative expenses 165,024 168,674
Restructuring charge 129,510 -
Depreciation and amortization 14,812 15,609
---------------- --------------
Loss before interest and income taxes (154,586) (23,525)
Interest expense-debt 14,973 14,113
Interest expense-capitalized leases 1,989 2,225
---------------- --------------
Loss before income tax benefit (171,548) (39,863)
Income tax benefit (64,331) (15,148)
---------------- --------------
Net loss ($107,217) ($24,715)
================ ==============
Weighted average common shares and common
share equivalents outstanding 100,127 101,366
================ ==============
Per common share:
Net loss per common share ($1.07) ($0.24)
================ ==============
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
<CAPTION>
(Unaudited)
--------------------------------
March 30, March 31, December 29,
1997 1996 1996 (1)
-------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $29,168 $27,248 $285,368
Accounts receivable, net of allowance of
$3,409, $3,074 and $4,593, respectively 45,592 42,926 61,454
Income taxes 50,912 2,898 -
Inventories 1,078,051 1,101,390 1,052,969
Prepaid expenses 21,221 31,978 15,461
-------------- -------------- ---------------
TOTAL CURRENT ASSETS 1,224,944 1,206,440 1,415,252
Property and equipment:
Owned assets, net of accumulated depreciation of
$540,681, $502,503 and $530,170, respectively 522,975 573,577 567,056
Capitalized leases, net of accumulated amortization of
$79,778, $83,492 and $86,710 respectively 36,481 42,909 37,701
Other assets and deferred charges 25,814 20,074 22,818
-------------- -------------- ---------------
TOTAL ASSETS $1,810,214 $1,843,000 $2,042,827
============== ============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $101,000 $185,000 -
Accounts payable 389,031 463,260 $595,262
Accrued expenses 166,262 156,212 212,223
State and local sales taxes 25,177 29,430 62,690
Accrued restructuring costs - current 27,066 - -
Income taxes - - 33,898
Current maturities of long-term debt 7,116 1,932 6,842
Current maturities of capitalized lease obligations 7,445 8,066 7,303
Deferred income taxes 7,437 11,715 7,437
-------------- -------------- ---------------
TOTAL CURRENT LIABILITIES 730,534 855,615 925,655
Accrued restructuring costs 67,301 - -
Long-term debt 628,331 556,401 623,615
Capitalized lease obligations 56,034 63,838 58,541
Deferred income taxes 7,922 4,888 7,922
-------------- -------------- ---------------
TOTAL LIABILITIES 1,490,122 1,480,742 1,615,733
-------------- -------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, authorized 4,600 shares,
undesignated as to rate and other rights, none issued
Series A Junior Preferred Stock, $1 par value, authorized
400 shares, none issued
Common stock, $.50 par value, authorized 500,000 shares, issued
and outstanding 99,758, 99,722 and 99,758 shares, respectively 49,879 49,861 49,879
Additional paid-in capital 5,653 5,591 5,670
Deferred compensation (1,019) (1,945) (1,251)
Retained earnings 265,579 308,751 372,796
-------------- -------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 320,092 362,258 427,094
-------------- -------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,810,214 $1,843,000 $2,042,827
============== ============== ===============
(1) Derived from fiscal year ended December 29, 1996 audited consolidated financial statements.
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
First Quarter Ended
---------------------------------------
March 30, March 31,
---------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($107,217) ($24,715)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 15,645 16,307
Gain on disposal of property and equipment (2,511) (2,789)
Write down of property and equipment due to restructuring 32,915 -
Changes in assets and liabilities (net of disposition):
Accounts receivable, net 15,862 10,695
Inventories (25,082) (66,923)
Prepaid expenses (5,760) (6,701)
Accounts payable (206,231) (157,409)
Accrued expenses and state and local sales taxes (83,049) (68,598)
Accrued restructuring costs 94,367 -
Income taxes (84,810) (32,107)
--------------- ---------------
NET CASH USED BY OPERATING ACTIVITIES (355,871) (332,240)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (4,388) (5,441)
Proceeds from the disposal of property and equipment 3,626 4,249
Other, net (3,473) 1,246
--------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (4,235) 54
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 101,000 185,000
Proceeds from long-term debt 6,560 -
Repayment of long-term debt (1,583) (1,008)
Repayment of capitalized lease obligations (1,945) (1,875)
Debt issuance costs (108) -
Exercise of stock options (forfeiture of restricted stock), net (18) 3
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 103,906 182,120
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (256,200) (150,066)
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 285,368 177,314
--------------- ---------------
CASH AND CASH EQUIVALENTS-END OF PERIOD $29,168 $27,248
=============== ===============
See Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. The consolidated financial statements, except for the consolidated
balance sheet as of December 29, 1996, have been prepared by the Company
without audit.
In management's opinion, the information and amounts furnished in this
report reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for the fair presentation of the financial position
and results of operations for the interim periods presented. These
financial statements should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended December 29, 1996.
The Company has historically incurred a net loss for the first quarter of
the year due to the seasonality of its business. The results of operations
for the first quarter ended March 30, 1997 and March 31, 1996 are not
necessarily indicative of the operating results for the entire fiscal year.
B. On March 25, 1997, the Company adopted a business restructuring plan to
close 60 underperforming stores and one distribution center. As a result, a
pre-tax charge of $129.5 million for restructuring costs was taken in the
first quarter of 1997. Management anticipates that a majority of these
stores and the distribution center will be closed by the end of the third
quarter of 1997, with the remaining closures completed by early 1998. In
addition to the restructuring charge, reduced margins will be reflected in
the Company's operating results as affected inventory associated with the
closing stores is liquidated. The components of the restructuring charge
and an analysis of the amounts charged against the accrual through March
30, 1997 are outlined in the following table:
<TABLE>
<CAPTION>
Activity to Date
-------------------------------------------
Accrued
Original Restructuring
Charge Restructuring Asset Costs as of
(In thousands) Recorded Costs Paid Write-downs March 30, 1997
------------------ ------------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Lease termination and other real
estate costs $ 83,225 $ - $ - $ 83,225
Property and equipment write-downs 32,915 - (32,915) -
Employee severance 4,869 (701) - 4,168
Other exit costs 8,501 (1,527) - 6,974
------------------ ------------------- ----------------------- -------------------
Total $ 129,510 $ (2,228) $ (32,915) 94,367
================== =================== =======================
Less: Current portion (27,066)
-------------------
$ 67,301
===================
</TABLE>
The stores planned for closure include both owned and leased properties.
Lease termination and other real estate costs consist principally of the
remaining rental payments required under the closing stores' lease
agreements, net of any actual or reasonably probable sublease income.
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<PAGE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
After taking into effect the above asset write-downs, the Company's
carrying value of the property and equipment associated with the closures
is $31.3 million as of March 30, 1997. Management anticipates selling
substantially all owned property and equipment associated with the
closures.
The employee severance provision was recorded for the planned termination
of approximately 4,100 employees associated with the closures, as well as
the overall restructuring of store staffing levels at the remaining stores.
Other exit costs consist principally of professional fees and other costs
associated with closing the stores and distribution center.
Net sales associated with the closing stores were approximately $68.6
million and $73.4 million for the three periods ended March 30, 1997 and
March 31, 1996, respectively. The pre-tax operating losses associated with
the closing stores, excluding corporate allocations, were approximately
($3.3) million and ($4.4) million for the three periods ended March 30,
1997 and March 31, 1996, respectively. Net sales associated with the
closing stores were approximately $391.0 million and $405.4 million for
fiscal years 1996 and 1995, respectively. The pre-tax operating income
associated with the closing stores, excluding corporate allocations, was
approximately $2.0 million and $6.4 million for fiscal years 1996 and 1995,
respectively.
C. The first quarter ended March 30, 1997 contained 90 selling days versus
the first quarter ended March 31, 1996 which contained 91 selling days.
D. The net loss per common share is computed by dividing the net loss by
the weighted average number of common shares and common share equivalents
outstanding.
E. Cash payments for interest for the first quarter ended March 30, 1997
and March 31, 1996 were $13.4 million and $10.1 million, respectively. Cash
payments for income taxes for the first quarter ended March 30, 1997 and
March 31, 1996 were $19.9 million and $17.0 million, respectively. The
Company considers all highly liquid investments purchased as part of its
daily cash management activities to be cash equivalents. Such investments
are generally made for periods covering 1 to 30 days.
F. The Company has available a Reducing Revolving Credit Facility ("Credit
Facility") with a maximum commitment level which reduces $25 million
annually until reaching $475 million at December 31, 1998. Currently, the
maximum commitment level is $525 million. Short-term borrowings related to
the Credit Facility were $101 million and $185 million as of March 30, 1997
and March 31, 1996, respectively. The Credit Facility matures on June 8,
1999.
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<PAGE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
The Company completed an amendment to the Credit Facility on March 25, 1997
which is expected to provide the Company with the flexibility to effect the
store closings and other strategic initiatives. The amendment excludes from
financial covenant calculations the impact of up to $175 million in pre-tax
charges and costs related to certain strategic initiatives such as the
store closing restructuring. The amendment also provides increased
operating flexibility with respect to certain financial covenants. Under
the amended Credit Facility, the effective interest rate increased to LIBOR
+ 1 3/8% from LIBOR + 1%. Subsequent changes in the Company's public debt
rating have further increased the effective interest rate on borrowings
under the amended Credit Facility to LIBOR + 1 3/4%. The interest rate is
subject to further change based on the Company's public debt rating. The
facility fee on the Credit Facility increased to 1/2% from 3/8% on the
entire committed amount. Additionally, the Company's bank group has
obtained security interests in the majority of unencumbered property and
assets (excluding inventory) of the Company. Certain other changes limit
the Company's level of capital spending, dividend payments and
indebtedness.
-8-
<PAGE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For comparative purposes, interim balance sheets are more meaningful when
compared to the balance sheets at the same point in time of the prior year.
Comparisons to balance sheets of the most recent fiscal year end may not be
meaningful due to the seasonal nature of the Company's business.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report includes certain forward-looking information that is based upon
management's beliefs as well as on assumptions made by and data currently
available to management. This information, which has been, or in the future may
be, included in reliance on the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, is subject to a number of risks and
uncertainties, including but not limited to the factors identified in the
Company's Form 10-K for the fiscal year ended December 29, 1996 filed with the
Securities and Exchange Commission. Actual results may differ materially from
those anticipated in such forward-looking statements even if experience or
future changes make it clear that any projected results expressed or implied
therein may not be realized. The Company disclaims any obligation to update any
information contained herein.
RESULTS OF OPERATIONS
The nature of the Company's business is highly seasonal. Historically, sales in
the fourth quarter have been substantially higher than sales achieved in each of
the first three quarters of the fiscal year. Thus expenses and, to a greater
extent, operating income vary greatly by quarter. Caution, therefore, is advised
when appraising results for a period shorter than a full year, or when comparing
any period other than to the same period of the previous year.
RESTRUCTURING CHARGE
On March 25, 1997, the Company adopted a business restructuring plan to close 60
underperforming stores and one distribution center. As a result, a pre-tax
charge of $129.5 million for restructuring costs was taken in the first quarter
of 1997. Management anticipates that a majority of these stores and the
distribution center will be closed by the end of the third quarter of 1997, with
the remaining closures completed by early 1998. In addition to the restructuring
charge, reduced margins will be reflected in the Company's operating results as
affected inventory associated with the closing stores is liquidated. The
components of the restructuring charge are outlined in a table in Note B of the
Notes to Consolidated Financial Statements.
-9-
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The restructuring was based on an analysis of individual store performance based
on cash flow return on committed capital, fit within marketing demographic
profiles and strategic geographic positioning. The Company anticipates that some
transfer sales may be attracted by other Service Merchandise stores operating in
the same geographic markets as some of the closed stores. After the effect of
charges and costs related specifically to the closings, the immediate ongoing
impact of the closings on net income will be immaterial because the stores to be
closed are near break-even contributors. The major benefit of the store closings
will be the freeing up of capital associated with these operations, rather than
a short-term opportunity to improve earnings. This capital will be redirected in
an effort to produce more appropriate returns. Additionally, the Company is
proceeding with a strategic assessment of its business including merchandising
strategies, product offerings and shopping format.
The net loss for the first quarter of 1997, including the impact of the $129.5
million pre-tax ($80.9 million after tax) restructuring charge, was $107.2
million, or $1.07 per share. Excluding the restructuring charge, net loss was
$26.3 million, or $0.26 per share, compared to a net loss of $24.7 million, or
$0.24 per share, for the first quarter of 1996.
FIRST QUARTER ENDED MARCH 30, 1997 VS. FIRST QUARTER ENDED
MARCH 31, 1996
NET SALES
Net sales for the first quarter of 1997 were $686.4 million compared to $715.6
million for the first quarter of 1996. This represents a net sales decrease of
$29.2 million or 4.1% with comp store sales (adjusted for the shift in Easter)
decreasing 2.5%. Affecting the total sales decrease was the fact that the
Company operated 399 stores during the first quarter of 1997 compared to 409
stores during the first quarter of 1996. The comparable store sales decrease was
driven primarily by a storewide sales event in the first quarter of 1996 which
was not repeated in the first quarter of 1997. Jewelry sales and hardline sales
were both off in the low single digit percentages for the quarter.
GROSS MARGIN
Gross margin, after buying and occupancy expenses, was $154.8 million, or 22.5%
of net sales for the first quarter of 1997 compared to $160.8 million, or 22.5%
for the first quarter of 1996. The decrease in gross margin dollars was
primarily due to a higher inventory shrinkage expense accrual and lower cash
discounts on lower purchases.
-10-
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first quarter of 1997 were
$165.0 million, or 24.0% of net sales compared to $168.7 million, or 23.6% of
net sales for the first quarter of 1996. Reduced employment costs and other
selling, general and administrative expenses contributed to the decrease of $3.7
million, although these reductions were partially offset by higher advertising
expenses. The increase as a percentage of net sales was attributable to lower
sales.
INTEREST EXPENSE
Interest expense for the first quarter of 1997 was $17.0 million as compared to
$16.3 million for the first quarter of 1996. Interest expense for the quarter
increased due to the issuance of $74.8 million in mortgage financing notes
primarily in the fourth quarter of 1996. This expense was partially offset by
lower borrowings against the Company's Credit Facility.
TAXES ON INCOME
The Company recognized an income tax benefit of $64.3 million and $15.1 million
for the first quarter ended March 30, 1997 and March 31, 1996, respectively.
This increase is primarily due to the restructuring charge outlined above. The
effective tax rates for the quarter ended March 30, 1997 and March 31, 1996 were
37.5% and 38%, respectively. For the fiscal year ended December 29, 1996 the
effective income tax rate was 37.5%.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $494.4 million at the end of the first quarter of
1997 from $350.8 million at March 31, 1996, an increase of $143.6 million or
40.9%. Short-term borrowings totaled $101 million ($402.6 million available for
borrowing) at March 30, 1997 compared to $185.0 million ($350.1 million
available for borrowing) at March 31, 1996, a decrease of $84.0 million. The
issuance of $74.8 million in mortgage financing notes primarily in the fourth
quarter of 1996 led to the decrease in short-term borrowings and had a
significant impact on increased working capital as payment obligations were
shifted from short-term to long-term. Additionally, reduced purchases
contributed to the decline in trade accounts payable. Furthermore, income taxes
classified as a current asset increased by $48.0 million primarily due to the
$129.5 million restructuring charge taken in the quarter. Partially offsetting
these items include accrued restructuring costs of $27.1 million classified as
short-term liabilities.
Working capital requirements fluctuate significantly during the year due to the
seasonal nature of the retail jewelry, gift and home business. These
requirements are financed through a combination of internally generated cash
flow from operating activities, short-term borrowings and long-term financing.
The current ratio at March 30, 1997 and March 31, 1996 was 1.7:1 and 1.4:1,
respectively.
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<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company has available a Reducing Revolving Credit Facility ("Credit
Facility") with a maximum commitment level which reduces $25 million annually
until reaching $475 million at December 31, 1998. Currently, the maximum
commitment level is $525 million. The Credit Facility matures on June 8, 1999.
The Company completed an amendment to the Credit Facility on March 25, 1997
which is expected to provide the Company with the flexibility to effect the
store closings and other strategic initiatives. The amendment excludes from
financial covenant calculations the impact of up to $175 million in pre-tax
charges and costs related to certain strategic initiatives such as the store
closing restructuring. The amendment also provides increased operating
flexibility with respect to certain financial covenants. Under the amended
Credit Facility, the effective interest rate increased to LIBOR + 1 3/8% from
LIBOR + 1%. Subsequent changes in the Company's public debt rating have further
increased the effective interest rate on borrowings under the amended Credit
Facility to LIBOR + 1 3/4%. The interest rate is subject to further change
based on the Company's public debt rating. The facility fee on the Credit
Facility increased to 1/2% from 3/8% on the entire committed amount.
Additionally, the Company's bank group has obtained security interests in the
majority of unencumbered property and assets (excluding inventory) of the
Company. Certain other changes limit the Company's level of capital spending,
dividend payments and indebtedness.
Total long-term debt, including current maturities and capitalized leases,
increased to $698.9 million at March 30, 1997 from $630.2 million at March 31,
1996. The increase in total long-term debt was primarily attributable to the
issuance of $74.8 million in mortgage financing notes slightly offset by
scheduled payments for capitalized lease obligations, mortgages and Industrial
Revenue Bonds.
Additions to owned property and equipment were $4.4 million for the first
quarter ended March 30, 1997 compared to $5.4 million for the same quarter last
year. The Company operated 399 stores as of March 30, 1997, a net decrease of 10
stores from March 31, 1996. The Company expects to incur capital expenditures of
approximately $50 million during fiscal 1996 and plans to fund these
expenditures through a combination of cash flows from operations and borrowings
under the Credit Facility.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". This pronouncement will be effective for financial statements for both
interim and annual periods ending after December 15, 1997. The Company
anticipates that this Statement will not have a material impact on its financial
statements.
-12-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in the Rights of the Company's Security Holders
The Company's amended Credit Facility permits the payment of dividends
in an aggregate amount not to exceed (i) 25% of the Company's
cumulative consolidated net income (as defined) commencing March 31,
1997 less (ii) the amount of investments made in Credit Card
subsidiaries on or after March 25, 1997.
Item 3. Defaults by the Company on Its Senior Securities
Not applicable.
Item 4. Results of Votes of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
-13-
<PAGE>
PART II - OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits filed with this Form 10-Q
Exhibit No. Under Item
601 of Regulation S-K Brief Description
---------------------- -----------------
4 Amendment No. 5 to Credit Agreement
effective March 25, 1997 among Service
Merchandise Company, Inc., various Banks
and The Chase Manhattan Bank as
Administrative Agent
11 Statement re:
Computation of Net Loss Per Common
Share for the First Quarter Ended
March 30, 1997 and March 31, 1996
27 Financial Data Schedule for the First Quarter
Ended March 30, 1997
6(b) Reports on Form 8-K
There were no reports on Form 8-K during the first quarter ended
March 30, 1997.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SERVICE MERCHANDISE
COMPANY, INC.
Date: May 12, 1997 /s/ Gary M. Witkin
-------------------------
Gary M. Witkin
President
(Chief Executive Officer)
Date: May 12, 1997 /s/ S. Cusano
-------------------------
S. Cusano
Executive Vice President and Chief
Financial Officer
(Chief Financial Officer)
(Chief Accounting Officer)
-15-
FIFTH AMENDMENT
---------------
FIFTH AMENDMENT (this "Amendment"), dated as of March 25, 1997, among
SERVICE MERCHANDISE COMPANY, INC. (the "Borrower"), the various lending
institutions party to the Credit Agreement referred to below (the "Banks"), and
THE CHASE MANHATTAN BANK (formerly known as CHEMICAL BANK), as Administrative
Agent (in such capacity, the "Administrative Agent"). All capitalized terms used
herein and not otherwise defined shall have the respective meanings provided
such terms in the Credit Agreement referred to below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower, the Banks and the Administrative Agent are parties
to a Credit Agreement, dated as of June 8, 1994 and amended by the First
Amendment thereto dated as of April 13, 1995, the Second Amendment thereto dated
May 23, 1996, the Third Amendment thereto dated as of September 16, 1996 and the
Fourth Amendment thereto dated as of January 15, 1997 (as so amended, the
"Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as herein
provided;
NOW, THEREFORE, it is agreed:
1. (a) On the Fifth Amendment Effective Date (as defined hereinbelow), the
Credit Agreement shall be amended to read as set forth in Exhibit A hereto (as
so amended, the "Amended Credit Agreement"), with the same effect as if each of
the parties hereto had executed and delivered to the Administrative Agent a
counterpart of the Amended Credit Agreement.
(b) Notwithstanding anything herein to the contrary, this Amendment
shall terminate and be of no force and effect if the Fifth Amendment Effective
Date shall not have occurred on or prior to March 31, 1997.
2. In order to induce the undersigned Banks to enter into this Amendment,
the Borrower hereby represents and warrants that (x) no Default or Event
<PAGE>
of Default exists on the Fifth Amendment Effective Date both before and after
giving effect to this Amendment and (y) all of the representations and
warranties contained in the Amended Credit Agreement shall be true and correct
in all material respects as of the Fifth Amendment Effective Date both before
and after giving effect to this Amendment, with the same effect as though such
representations and warranties had been made on and as of the Fifth Amendment
Effective Date (it being understood that any representation or warranty made as
of a specified date shall be required to be true and correct in all material
respects only as of such specific date).
3. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
4. This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument. A complete set of counterparts
shall be lodged with the Borrower and the Administrative Agent.
5. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE
OF NEW YORK.
6. This Amendment shall become effective on the date (the "Fifth Amendment
Effective Date") when the Borrower and the Required Banks (i) shall have signed
a counterpart hereof (whether the same or different counterparts) and (ii) shall
have delivered (including by way of telecopier) the same to the Administrative
Agent at the Notice Office.
7. From and after the Fifth Amendment Effective Date all references in the
Credit Agreement and the other Credit Documents to the Credit Agreement shall be
deemed to be references to the Amended Credit Agreement.
-2-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
Address:
- -------
7100 Service Merchandise Drive SERVICE MERCHANDISE
Brentwood, TN 37027 COMPANY, INC.
Attn: Thomas L. Garrett, Jr.
Telephone: (615) 660-6000 By /s/ Wade Smith
Telecopy: (615) 660-3667 --------------------------
Title: Vice President
and Assistant Treasurer
270 Park Avenue THE CHASE MANHATTAN BANK
10th Floor Individually, and as
New York, NY 10017 Administrative Agent
Attn: William P. Rindfuss
Telephone: (212) 270-4565 By _________________________
Telecopy: (212) 270-1474 Title:
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
Address:
7100 Service Merchandise Drive SERVICE MERCHANDISE
Brentwood, TN 37027 COMPANY, INC.
Attn: Thomas L. Garrett, Jr.
Telephone: (615) 660-6000 By__________________________
Telecopy: (615) 660-3667 Title:
270 Park Avenue THE CHASE MANHATTAN BANK
10th Floor Individually, and as
New York, NY 10017 Administrative Agent
Attn: William P. Rindfuss
Telephone: (212) 270-4565 By /s/ William P. Rindfuss
Telecopy: (212) 270-1474 --------------------------
Title: William P. Rindfuss
Vice President
<PAGE>
277 Park Avenue ARAB BANKING CORPORATION
32nd Floor
New York, NY 10172
Attn: Louise Bilbro
Telephone: (212) 583-4758 By /s/ Louise Bilbro
Telecopy: (212) 583-0921 --------------------------
Title: Louise Bilbro
Vice President
100 Federal Street, 01-09-05 THE FIRST NATIONAL BANK OF
Boston, MA 02110 BOSTON
Attn: Peter L. Griswold
Telephone: (617) 434-8312 By__________________________
Telecopy: (617) 434-6685 Title:
700 Louisiana THE BANK OF MONTREAL
Suite 4400
Houston, TX 77002
Attn: Tom McGraw
Telephone: (713) 546-9781 By__________________________
Telecopy: (713) 223-5551 Title:
One Wall Street THE BANK OF NEW YORK
New York, NY 10286
Attn: Paula DiPonzio
Telephone: (212) 635-7867 By /s/ Paula DiPonzio
Telecopy: (212) 635-1483 --------------------------
Title: Vice President
<PAGE>
1251 Avenue of the Americas THE BANK OF TOKYO-
12th Floor MITSUBISHI, LTD.
New York, NY 10020
Attn: Paul P. Malecki
Telephone: (212) 782-4343 By /s/ Paul P. Malecki
Telecopy: (212) 782-4981 --------------------------
Title: PAUL P. MALECKI
Vice President
1251 Avenue of the Americas THE BANK OF TOKYO-
12th Floor MITSUBISHI TRUST COMPANY
New York, NY 10020
Attn: Paul P. Malecki
Telephone: (212) 782-4343 By /s/ Paul P. Malecki
Telecopy: (212) 782-4981 --------------------------
Title: PAUL P. MALECKI
Vice President
787 7th Avenue BANQUE PARIBAS
32nd Floor
New York, NY 10019
Attn: Mary Finnegan
Telephone: (212) 841-2551 By /s/ Mary T. Finnegan
Telecopy: (212) 841-2333 --------------------------
Title: Mary T. Finnegan
Group Vice President
By /s/ Robert G. Carino
--------------------------
Title: Robert G. Carino
Vice President
<PAGE>
425 Lexington Avenue CIBC Inc.
8th Floor
New York, NY 10017
Attn: Christopher Kleczkowski
Telephone: (212) 856-3560 By /s/ Christopher P. Kleczkowski
Telecopy: (212) 856-3991 --------------------------
Title: Director, CIBC Wood Gundy
Securities Corp., AS AGENT
75 Wall Street DRESDNER BANK AG,
25th Floor NEW YORK BRANCH
New York, NY 10005
Attn: Anthony Berti
Telephone: (212) 429-2247 By__________________________
Telecopy: (212) 429-2781 Title:
By__________________________
Title:
Marquis One Tower THE FUJI BANK, LTD.
Suite 2100
245 Peachtree Center Ave., NE
Atlanta, GA 30303
Attn: David Hart
Telephone: (404) 215-3314 By /s/ Toshihiro Mitsui
Telecopy: (404) 653-2119 --------------------------
Title: Vice-President and Manager
Two World Trade Center THE HOKKAIDO TAKUSHOKU
99th Floor BANK, LTD.
New York, NY 10048
Attn: Scott D. Winston
Telephone: (212) 912-6914 By /s/ Kathleen M. Sweeney
Telecopy: (212) 466-6079 --------------------------
Title: SVP and Manager
<PAGE>
1251 Avenue of the Americas THE INDUSTRIAL BANK OF JAPAN,
New York, NY 10020 LIMITED - NEW YORK BRANCH
Attn: James Welch
Telephone: (212) 282-3690 By /s/ Takuya Honjo
Telecopy: (212) 282-4250 --------------------------
Title: TAKUYA HONJO
SENIOR VICE PRESIDENT
165 Broadway LTCB TRUST COMPANY
New York, NY 10006
Attn: Edna Astuto
Telephone: (212) 335-4560 By /s/ John J. Sullivan
Telecopy: (212) 608-2371 --------------------------
Title: Executive Vice President
140 Broadway HSBC AMERICAS, INC.
5th Floor
New York, NY 10005
Attn: Gina Sidorsky
Telephone: (212) 658-2750 By /s/ J.B. Lyons
Telecopy: (212) 658-2586 --------------------------
Title: SENIOR VICE PRESIDENT
500 West Jefferson St. PNC BANK, KENTUCKY, INC.
Louisville, Kentucky 40202
Attn: Ralph Phillips
Telephone: (502) 581-4543 By /s/ Ralph M. Bowman
Telecopy: (502) 581-2302 --------------------------
Title: Vice President
520 Madison Avenue THE MITSUBISHI TRUST AND
25th Floor BANKING CORPORATION
New York, NY 10022
Attn: Susan LeFevre
Telephone: (212) 891-8454 By /s/ Patricia Loret de Mola
Telecopy: (212) 644-6825 --------------------------
Title: Senior Vice President
<PAGE>
One NationsBank Plaza NATIONSBANK, N.A.
5th Floor
Nashville, TN 37239-1697
Attn: Kimberly Dupuy
Telephone: (615) 749-3174 By__________________________
Telecopy: (615) 749-4640 Title:
245 Park Avenue THE NIPPON CREDIT BANK, LTD.
30th Floor
New York, NY 10167
Attn: Barry Fein
Telephone: (212) 984-1261 By /s/ Barry S. Fein
Telecopy: (212) 490-3895 --------------------------
Title: Assistant Vice President
Marquis One Tower THE SAKURA BANK, LIMITED
Suite 2703
245 Peachtree Center Ave., N.E.
Atlanta, GA 30303
Attn: Chad Zimmerman
Telephone: (404) 521-3111 By /s/ Hiroyasu Imanishi
Telecopy: (404) 521-1133 --------------------------
Title: HIROYASU IMANISHI
V.P. & SENIOR MANAGER
Georgia Pacific Center THE SUMITOMO BANK, LIMITED
133 Peachtree Street, N.E.
Suite 3210
Atlanta, GA 30303
Attn: Thomas Lawson
Telephone: (404) 526-8513 By /s/ Masayuki Fukushima
Telecopy: (404) 521-1187 --------------------------
Title: JOINT GENERAL MANAGER
MASAYUKI FUKUSHIMA
<PAGE>
55 East 52nd Street THE TOKAI BANK, LTD.
New York, NY 10055 NEW YORK BRANCH
Attn: Haruyo Niki
Telephone: (212) 339-1123 By__________________________
Telecopy: (212) 832-1428 Title:
One Detroit Center COMERICA BANK
500 Woodward Avenue, MC 3280
Detroit, MI 48226
Attn: Kristine L. Andersen
Telephone: (313) 222-3648 By /s/ Kristine L. Andersen
Telecopy: (313) 222-3330 --------------------------
Title: Kristine L. Andersen,
Account Officer
640 5th Avenue BANK OF IRELAND, CAYMAN
2nd Floor ISLAND BRANCH
New York, NY 10019
Attn: Roger Burns
Telephone: (212) 397-1712 By /s/ Roger Burns
Telecopy: (212) 586-7752 --------------------------
Title: Vice President
1211 Avenue of the Americas WESTDEUTSCHE LANDESBANK
23rd Floor GIROZENTRALE, NEW YORK AND
New York, NY 10036 CAYMAN ISLAND BRANCHES
Attn: Alan Bookspan
Telephone: (212) 852-6023 By__________________________
Telecopy: (212) 852-6307 Title:
By__________________________
Title:
<PAGE>
1 Parkview Plaza VAN KAMPEN AMERICAN CAPITAL
Oakbrook Terrace, IL 60181 PRIME RATE INCOME TRUST
Attn: Jeffrey W. Maillet
Telephone: (630) 684-6436 By /s/ Jeffrey W. Maillet
Telecopy: (630) 684-6740 --------------------------
Title: JEFFREY W. MAILLET
Sr. Vice Pres. - Portfolio Mgr.
285 Peachtree Center Ave., N.E. THE YASUDA TRUST AND
Suite 2104 BANKING COMPANY, LTD.
Atlanta, GA 30303
Attn: Sanjay Sinha
Telephone: (404) 584-8230 By /s/ Morikazu Kimura
Telecopy: (404) 584-7816 --------------------------
Title: MORIKAZU KIMURA
CHIEF REPRESENTATIVE
One Ravinia Drive ABN AMRO BANK N.V.,
Suite 1200 ATLANTA AGENCY
Atlanta, GA 30346-2103
Attn: Linda Davis
Telephone: (770) 396-0066 By /s/ Steven L. Hipsman
Telecopy: (770) 395-9188 --------------------------
Title: VICE PRESIDENT
By /s/ Larry K. Kelley
--------------------------
Title: GROUP VICE PRESIDENT
<PAGE>
<TABLE>
EXHIBIT 11
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Computation of Net Loss Per Common Share (Unaudited)
(In thousands, except per share data)
<CAPTION>
First Quarter Ended
------------------------------------------------
March 30 March 31
1997 1996
-------------------- --------------------
Primary
- -------
<S> <C> <C>
Net loss ($107,217) ($24,715)
==================== ====================
Shares:
Weighted average common shares outstanding 99,259 99,184
Weighted average shares of restricted
stock outstanding 499 520
Additional shares assuming exercise of stock options 369 1,662
-------------------- --------------------
Weighted average common shares and common
share equivalents outstanding - primary 100,127 101,366
==================== ====================
Primary net loss per common share ($1.07) ($0.24)
==================== ====================
Assuming Full Dilution
- ----------------------
Net loss ($107,217) ($24,715)
==================== ====================
Shares:
Weighted average common shares outstanding 99,259 99,184
Weighted average shares of restricted
stock outstanding 499 520
Additional shares assuming exercise of stock options 369 1,674
-------------------- --------------------
Weighted average common shares and common
share equivalents outstanding - fully diluted 100,127 101,378
==================== ====================
Fully diluted net loss per common share ($1.07) ($0.24)
==================== ====================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Service
Merchandise Company, Inc. Form 10-Q for the quarterly period ended March 30,
1997 and is qualified in its entirety by reference to such financial statements
detailed in Part I of the Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 29,168
<SECURITIES> 0
<RECEIVABLES> 49,001
<ALLOWANCES> 3,409
<INVENTORY> 1,078,051
<CURRENT-ASSETS> 1,224,944
<PP&E> 1,179,915
<DEPRECIATION> 620,459
<TOTAL-ASSETS> 1,810,214
<CURRENT-LIABILITIES> 730,534
<BONDS> 684,365
0
0
<COMMON> 99,758<F1>
<OTHER-SE> 270,213
<TOTAL-LIABILITY-AND-EQUITY> 1,810,214
<SALES> 686,400
<TOTAL-REVENUES> 686,400
<CGS> 531,640
<TOTAL-COSTS> 531,640
<OTHER-EXPENSES> 179,836<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,962
<INCOME-PRETAX> (171,548)
<INCOME-TAX> (64,331)
<INCOME-CONTINUING> (107,217)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (107,217)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
<FN>
<F1> Amount represents the number of shares of $0.50 par value common stock
issued and outstanding.
<F2> Amount includes I) depreciation and amortization and II) selling, general
and administrative expenses.
</FN>
</TABLE>
